RPM International Inc.

Good day and welcome to the RPM International Fiscal First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Matt Schlarb, Vice President, Investor Relations and Sustainability. Please go ahead.

Thank you, Rocco, and welcome to RPM International's conference call for the fiscal 2025 first quarter. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's chair and CEO, Rusty Gordon, Vice President and Chief Financial Officer, and Michael LaRoche, Vice President, Controller, and Chief Accounting Officer. This call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During the conference call, references may be made to non-GAAP financial measures, To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments will be on an as-adjusted basis, and all comparisons are to the first quarter of fiscal 2024, unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on this call. It can be accessed in the presentation and webcast section of the RPM website at www.rpminc.com. Now I would like to turn the call over to Frank.

Thank you, Matt, and thank you to everyone for joining us today. We're hosting this call from our Innovation Center of Excellence in Greensboro, North Carolina, and I want to begin today by sending our sincere sympathy to all of the people in North Carolina and elsewhere who were impacted by Hurricane Helene. The devastation is heartbreaking, and our businesses are contributing to initial response efforts to help bring some sense of normalcy back to people's lives. This includes Legend Brands, which is supplying disaster restoration equipment and products to help people and businesses save and restore homes with water damage. At our Tremco business, our teams are helping customers with roofing and other issues by providing tarps and generators. They're also supplying water and food to people in need, including RPM associates affected by the hurricane. We're all hoping for a fast recovery for the impacted region, and RPM businesses and associates are contributing to this effort. Turning to our first quarter results, I'll begin with a high-level review, then turn the call over to Mike LaRoche, who will go over the financials in more detail. Matt Schlarb will then give a balance sheet update and provide some insights into our ability to capture growth, opportunities, and Rusty Gordon will cover the outlook. After that, we'll be happy to answer your questions. We'll begin on slide three with our first quarter results. Overall, our associates are doing an excellent job in controlling the things that we can in a mixed and uncertain economic environment. This includes continuing to execute our MAP 2025 initiatives and capturing growth opportunities where they exist. These self-help actions enable us to achieve our 11th consecutive quarter of record adjusted EBIT. Across RPM, our associates are adapting to challenging economic conditions to continue to drive growth. This includes pivoting to growing end markets, finding new efficiencies in our operations, and investing in targeted growth initiatives. The cash flow momentum we built in fiscal 24 was sustained in the first quarter, where we leveraged our MAP 2025 to continue making structural improvements to working capital efficiency. This resulted in another quarter of strong cash flow generation, which enabled us to repay an additional $75 million in debt. Over the prior 12 months, we have repaid $453 million in debt, and the resulting lower interest expense combined with adjusted EBIT growth led to adjusted EPS increasing 12.2% to a record $1.84. Moving to slide four, our construction products and Performance Coatings Group led growth by focusing on the repair and maintenance businesses as well as growing in new construction markets. Aided by our entrepreneurial sales culture and broad portfolio of differentiated products and services for high performance buildings, our teams have demonstrated their ability to capture growth opportunities where they exist. Over the past several years, we have pivoted from distribution centers to EV manufacturing and battery plants, to the now strong infrastructure and data center markets. Despite the current no growth environment, both of these segments generated record EBIT margins, which demonstrates the impact of our MAP 2025 initiatives and how they can have tremendous impact with growing volume to fully leverage these operational improvements that we put in place and that are continuing. In our consumer and specialty products group, which have the most exposure to residential end markets, demand remains challenged. Importantly, they remain focused on executing our MAP 2025 initiatives and were thus able to expand adjusted EBIT margins despite unabsorption headwinds from lower volumes. Our adjusted EBIT margin expansion matched our gross profit expansion and was aided by the SG&A streamlining actions we implemented at the end of fiscal 2024, such that our actual dollars of SG&A spend in this quarter were below the SG&A dollars in the prior year first quarter. Overall, I'm pleased with our associates' ability to navigate the mixed economic environment and achieve our 11th consecutive quarter of record adjusted EBIT. Through investments in our business, and increased collaboration, we are working to generate volume growth and realize the full benefits of our MAP 2025 initiatives. I'll now turn the call over to Mike LaRoche to cover the financials in more detail.

Thanks, Frank. Turning to our consolidated results on slide five. Sales declined 2.1%, driven by FX headwinds and a slight decline in organic revenue. Pricing was slightly positive during the quarter. Adjusted EBIT grew 6.3% to a first quarter record driven by MAP 2025 benefits, including commodity cycle benefits, and progress on plant consolidations. SG&A declined, aided by the streamlining actions we implemented at the end of fiscal 2024. Adjusted EPS increased 12.2% to $1.84, which was a record, driven by the adjusted EBIT growth and lower interest expense due to debt repayments over the past year. Moving to geographic results on slide six, sales declined in North America where business trends generally mirrored the overall company. In Europe, FX headwinds and previously announced divestitures resulted in a sales decline, but we continue making progress with MAP 2025 in the region and generated profitability growth. In emerging markets, FX headwinds were particularly pronounced in Latin America and drove the sales decline there. Asia Pacific and Africa Middle East grew as they benefited from spending on infrastructure and high performance building projects. Next, moving to the segment results and starting with the construction products group on slide seven. The segment's growth was driven by turnkey roofing systems and wall systems, which are being used in both new construction projects and renovations. This growth is in addition to double digit growth CPG generated last year. CPG achieved record Q1 adjusted EBIT due to improved fixed cost leverage from higher volumes, MAP 2025 benefits, and a focus on selling higher margin products. On slide eight, performance coatings group had a positive organic growth driven by the flooring business. Emerging markets also contributed to organic growth, which was in addition to strong growth in the prior year. This was more than offset by FX headwinds and the previously announced European Infrastructure Service business divestiture in the prior year. Adjusted EBIT was a first quarter record and was driven by MAP 2025 benefits and improved fixed cost leverage from higher volumes. Moving to slide nine, specialty products group sales declined as demand in specialty OEM markets with housing exposure remained soft. Customers in the disaster restoration business entered the hurricane season with high inventories, which muted the impact of storm-related flooding during the quarter. The food group grew during the first quarter, aided by new business wins and a small acquisition. Adjusted EBIT grew during the quarter as MAP 2025 benefits more than offset the underabsorption from lower volumes. On slide 10, the consumer group continued to face challenging market conditions as DIY demand at retail stores remained weak and those retailers reduced inventory levels. The rationalization of lower margin products also contributed to the sales declines. International markets grew during the quarter, primarily driven by targeted marketing initiatives directed toward end users that allowed us to outpace the broader market. Although adjusted EBIT declined due to lower sales and unfavorable fixed cost absorption, MAP 2025 initiatives and the rationalization of lower margin products resulted in adjusted EBIT margin expansion during the quarter. Now I'll turn the call over to Matt Schlarm, who will cover the balance sheet, cash flow, and provide an update on innovation.

Thank you, Mike. Moving to slide 11, cash flow from operations totaled $248 million for the first quarter, as operating working capital as a percentage of sales improved by 250 basis points from the prior year period, driven by MAP 2025 structural improvements in working capital. Over the past two years, this metric has improved by 540 basis points. During the quarter, we used a portion of this cash flow generation to repay debt, which declined by $75 million in the quarter, and $453 million over the past year. We returned $76 million to shareholders through dividends and share purchases during the quarter. Additionally, we are making investments in a new production facility in Belgium that is expected to open by the end of the calendar year. This facility will be overseen by Specialty Products Group, but will supply residents to all four segments as well as external parties. The new Belgium facility represents the fourth RPM plant that is focused on intercompany sales which are a key element of our procurement strategy to enhance resiliency in our supply chain. Earlier, Frank talked about how our businesses are pivoting to growing end markets, and I'd like to highlight one example on slide 12. Spending on data center construction is up significantly over the past year, and our businesses are playing an important role in the construction of these high-performance buildings. Our products and services meet the demanding requirements of these facilities, including having a waterproof structure, meeting fire safety standards, protecting expensive equipment from electric discharges, and allowing the facilities to continue operating through ongoing maintenance and repairs. Additionally, benefits from our suite of products and services include reducing labor needs and faster construction. These are important not just in the data center construction, but throughout the entire construction industry that is struggling with skilled labor availability. Combined with our entrepreneurial sales culture, these high-performance products, systems, and services have allowed us to capture these growth opportunities and will allow us to pivot towards expanding markets in the future. Now I'd like to turn the call over to Rusty Gordon to cover the outlook.

Thanks, Matt. Our second quarter outlook is on the next page, slide 13. On a consolidated level, second quarter sales are expected to be approximately flat compared to a record prior year period, with the mixed economic backdrop continuing. Uncertainty surrounding the U.S. elections may cause some customers to defer decisions on spending, and the impact of recent strikes at East Coast ports remains unknown. By segment, CPG is expected to generate low single-digit revenue growth in addition to record results in the prior year period when revenue grew 8%. Growth is expected to be driven by high-performance roofing and wall systems serving restoration and new construction projects. In PCG, sales are expected to be approximately flat, which includes the positive impact of more effective sales management systems. In SBG, overall demand is expected to decline by low single digits as residential-focused OEM demand remains soft, while other OEM businesses show signs of stabilization. In consumer group, sales are expected to be down low single digits. Continued DIY softness is expected to be partially offset by market share gains and growth in international markets. Rationalization of lower margin products will be a headwind to sales, but a benefit to margins. Consolidated second quarter adjusted EBIT is expected to increase in the mid single digit percentage range compared to a record prior year period, driven by MAP 2025 benefits and improved fixed cost utilization at some of our businesses. Our fiscal 2025 full year guidance is on the following slide. Our view on the overall economic environment remains similar and our guidance is unchanged to what we previously communicated with sales up low single digits and adjusted EBIT increasing in the mid single digits to low double digit range. We expect overall pricing to be slightly positive in response to continued inflation in areas like labor and benefits, and we expect moderate increases in raw material costs in the second half of the fiscal year. Thanks to the progress we have made in our center-led procurement teams and CS168, we are better positioned to have our pricing reflect increases in raw material costs in a timely manner. By segment, CPG should outpace its markets with its differentiated product and service offerings and should continue to benefit from spending on infrastructure, high-performance building and restoration projects, while office construction remains sluggish. At PCG, they continue to benefit from increased spending on infrastructure projects, high-performance buildings, and emerging market growth. We continue to expect spending on reshoring projects to moderate in some areas, like battery plants, and expand in others, like data centers and pharmaceutical manufacturing. At consumer and SPG, which are most closely tied to residential housing, we are encouraged to see interest rates declining, but it is too early to determine when this will translate into an increase in housing turnover. In the interim, we remain focused on operating improvements, so we are prepared to respond to a market rebound when it materializes. On a consolidated level, adjusted EBIT growth is expected to be driven by MAP 2025 benefits, with the timing and magnitude determined by how quickly and to what extent volume growth returns. We also anticipate that we will continue to improve our working capital efficiency, which will lead to another year of strong cash flow. This concludes our prepared remarks. We are now pleased to answer your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from John McNulty with BMO Capital Markets. Please go ahead.

Good morning, John. Yeah, good morning, Frank. Thanks for taking my question and congrats on a nice strong quarter in a difficult environment. And I guess to that, so the consumer margins are putting up some pretty solid numbers. I mean, I think it was 18 and a half percent this quarter, which is nearly a record for the first quarter. And that's despite some really challenging volumes. So I guess, can you help us to think about the operating leverage in this business now that MAP is really kind of working its way through and how we can think about kind of what the margin profile would look like for the business in a more normalized DIY type environment?

Sure, I'll comment to your question about consumer, but it really applies to all of our businesses. We have executed really well on our MAP to Growth and our MAP 2025 follow-on operating improvement initiatives. We've gained efficiencies in our conversion costs. particularly true in consumer and at Rust-Oleum. And I've commented in the past, without additional dollars of capital, we have uncovered almost 80 million units of new capacity. And that gives you a sense of the benefits that our operating improvement initiatives have uncovered. That doesn't do us much good unless we can sell it. And so we are really poised to lever growth to the bottom line. You can see that with the nice leverage in the construction products group and the performance coatings group, both of whom had positive unit volume growth in the quarter. And I think as you're referencing, you can see the operating leverage even in our consumer segment when volumes will come back, which they will. The last comment I'll make is across every segment of RPM, You know, we have been very deliberate and focused SG&A spends on new product areas and on growth areas, as Rusty commented. We are moving our sales forces to the few pockets of where growth exists. But in each of our segments in Q1, our dollar spend in SG&A was below last year. So we are taking a pretty targeted and disciplined approach to SG&A, and you'll see that continue in Q2.

Got it. Okay. No, that's helpful. And then I guess just the second question would just be on the specialty segment. I think you mentioned in the release that, you know, there were some inventory issues around the Legends business. I guess how long do you expect it to take to kind of work through that, and should we see an uptick just given some of the issues that we're seeing in the U.S. now around some of the hurricane problems?

Yeah. For the first time in probably four or five quarters, you're seeing positive EBIT growth in our specialty segment. And it feels very much to me like their challenged environment has bottomed out. They are particularly exposed to residential new construction indirectly with their wood finishes work that goes into doors and windows, into manufactured housing. And so it was really, I think, good and comforting to see them to return to positive EBIT margin generation. And I think the sales challenges that they faced for the last, boy, four or six quarters have bottomed out. And you will see improved, modest improved performance in the specialty product segment as we go throughout the rest of the year.

Great. Thanks very much for the caller. Thank you.

Thank you. And our next question today comes from Frank Mitch with Fermium Research. Please go ahead.

Morning, Frank.

Hey, good morning. Good morning to you as well, and good luck in the playoffs. Obviously, I'm talking baseball, not football. Sorry. You indicated, I think, in the last conference call that there was an expectation that maybe price would be up 1% in fiscal 2025. I believe... Rusty said that the expectation is slightly positive. So I'm curious if that's kind of a good placeholder. I think you indicated that you're going to offset raw materials. And given the wide range on EBIT for the balance of this year, what would be a reasonable range of volume expectations that you have as you sit here today for fiscal 2025? Sure.

On price, we benefited by about a half a percent in the quarter. We are facing some modest raw material increases in propellants, certain solvents, and resins. And so I think the number that Rusty cited still feels good for the balance of the year of about 1% price. That presumes we don't see any dramatic impacts in higher raw material costs, which at this point seem to be pretty stable. In terms of growth, it's anybody's guess, but I would tell you that if we are starting on a path of interest rate decreases, that will be the period of time in which you're going to see a recovery in housing turnover, which remains at a 30-year low. Big driver of our consumer segment takeaway and also new home construction and turnover for specialty products group. It does not take a lot of positive volume growth to leverage nicely to our bottom line. So for instance, even in the second quarter, our outlook is flat. If things perk up here a little bit and we can provide a 1% or 2% positive growth, you'll see that leverage nicely and better than our guidance to the bottom line. That's speculative, but we don't need 4% or 5% growth to leverage really strong performance to the bottom line. We just need positive results, and you see that in our two more industrial segments in this quarter.

Understood and very helpful. Just curious, On the topic of the benefits of the rate cuts and the timing, what sort of indications are you getting from your customer base, particularly on the consumer side, in terms of their expectations as to when we might see the benefits take place? Six months, nine months, 12 months, 15? Any sort of indications from your customer base on what their expectations are?

Not really. I will tell you the inventories are at exceedingly low levels. And so, you know, that's an area that were we to see a rebound in growth, I think will also help us kickstart at least temporarily filling inventories in some cases to more normal levels. But Rusty Gordon did a very nice job for our board in the past year, year and a half, of actually mapping what was extraordinarily solid organic growth. My recollection is in the fall of 23. And tracking our unit volume growth by segment and SBU to the Fed rate hikes, you know, interest rate increases. And it took about two or three quarters of the Fed increasing interest rates until we saw the negative impact, which was their intent. particularly in housing and, again, affecting specialty and consumer. And then it went negative. And we've had those challenges for the last three or four quarters. So with that, I would tell you it probably is going to take a couple of quarters of interest rate reductions before the benefits of those start flowing into the economy and our business. So I would guess the spring of of this year, and if it starts to hit, there is not much in the way of meaningful volume improvement in our current guidance. Okay. Very helpful. Thank you.

Thank you. And our next question today comes from Kevin McCarthy of Vertical Research Partners. Please go ahead.

Good morning, Kevin. Good morning, Frank. I would welcome your updated thoughts on capital deployment. I guess looking in the rear view, it seems as though you did a small deal in specialty products. But more importantly, just thinking about the deleveraging that you've done, and by my math, you're down about 1.4 times EBITDA in terms of the net debt balance. So what are you seeing in the private market, and how would you weigh that versus potential to accelerate repurchases or alternative uses of cash?

Sure. We are committed to the capital allocation model that has been the hallmark of RPM, investing in internal growth, investing in acquisitions, raising our dividend. We have our annual meeting of stockholders tomorrow, and our board will consider what would likely be our 51st consecutive increase in cash dividends. And we are committed on a regular basis now, regardless of stock price, to about $50 million a year, maybe a little bit more of share repurchases. And beyond that, I think we'll be opportunistic. But our ability to repurchase shares on a more regular and more consistent and larger basis exists in ways it didn't. Our balance sheet is in the best shape. it's ever been in in my 35 year career at rpm and so that feels pretty good specific to acquisitions we are pursuing a lot of small product lines because we can get them done the m a market chilled through the kind of supply chain hiccups and the interest rate rises it's starting to loosen up a little bit and we will continue to pursue the small the medium-sized acquisition strategy that's been so successful for us in the past. And our ability to leverage product lines or businesses because of our MAP initiatives are better today than they've ever been.

Very helpful. And then second, if I may, Frank, would you provide an update on your MAP program execution? Just kind of walk through where we are today in terms of asset consolidation, headcount, other cost savings. what's behind the company and what's still ahead in coming quarters?

Sure. Great question. I would say we're in the fourth or fifth inning of our MAP programs that started in the fall of 2018. Our MS168 approach, which is really a center-led operating efficiency and continuous improvement approach to our manufacturing and operations, has really done quite well. And we are taking that now to Europe. Dave Denstead who runs our performance coding group and his family moved to Europe a year and a half ago, really accelerating the MAP initiatives there that got stalled a little bit because of COVID. But we are on target for the original $465 million of projected MAP25 savings. That would imply 185 million of MAP benefits on a full run rate basis by May 31, 2025 for this fiscal year. And I think it's highly likely that we will meet or beat that 465 total program goal. The challenge for us in our MAP initiative, and it's not unique to us, is growth. When you look at this quarter, I think that the 42% gross profit goal and the 16% EBIT margin goal on a consolidated basis are within reach. And that is without the benefit of the $8.5 billion total revenues that we had targeted. We're going to fall short of that in all likelihood. And so it really gives you the sense of the strong execution we've had. Had we come anywhere close to the $8.5 billion in revenues, we'd blow through those margin targets.

Thank you so much. Very helpful.

Thank you. And our next question today comes from David Huang with Deutsche Bank. Please go ahead.

Good morning. Good morning. Uh, in consumer, I guess volume was, uh, worse than expected in August since you gave guidance in late July. And I think you talked about continued consumer, I mean, customer de-stocking despite low inventory levels. Can you just talk about what has happened there? And I guess, how is that trends in September versus August?

Sure. So. The performance in consumer was as expected. You know, it was a combination of lower inventory levels, particularly in some of our big box retailers, and a continuing low to mid single digit consumer negative takeaway versus prior years. We see that bottoming out this fall in terms of consumer takeaway. And as I indicated in response to an earlier question, I think inventory levels across most of our customers are at a point where if there is and when there is, because there will be at some point a pickup in consumer takeaway and positive volume, you'll also see some adjustments in inventory to meet that demand. So we are where we expected to be. It's disappointing. We are in our 15th month of negative consumer takeaway. I've been at RPM 35 years and have never seen this period of kind of flat to negative results in our consumer segment. It's not unique to us. And I think when you compare to the most directly comparable segments of some of our major peers, our consumer performance collectively is equal to or better than what we're seeing elsewhere. So we're managing it well, and I think we're well positioned on the upturn. Also, as Rusty and Matt talked about, we've got some new product introductions that we're pretty excited about, both in DAP and Rust-Oleum, and we're seeing some solid growth. The only place we're seeing positive growth is in our mostly European, UK consumer business with some really nice uptakes as they continue to improve their operations.

Got it. On the positive side, you highlighted some data center opportunities on the slide. Can you maybe help us size and think about the opportunity in your backlog and your ability to capture shares in the market?

Sure. I can't size the data center or any market in particular, I can tell you in our construction products group with panelization, with the roofing opportunities that we see, particularly with the Tremco roofing supply and apply model with the challenges of labor, and in the Stonehard performance coatings group, Stonehard space and flooring, again, the supply and apply model, and where that's somewhat of an advantage with some challenged labor markets. Our backlogs are better. today than they were a year ago. As we had commented in the last conference call, we have seen some of these big projects be pushed out. Intel is a good example. Some of their big new construction, new fab plants where we're specified have moved out in terms of timelines by a matter of 12 or 18 months. And so we have seen some big projects deferred. But backlogs are pretty strong in our more industrial segment businesses. Thank you.

Thank you. And our next question today comes from Vincent Andrews at Morgan Stanley. Please go ahead.

Morning, Vince.

Morning. Thank you. Could you give a little more detail on the skew rationalization you're doing in consumer group, both in terms of what the products are, maybe what that sort of negative weight's going to be on your volume going forward and just, you know, how below segment average margins are those products?

Sure. We have a branded and private label architectural paint plant and business in Europe that's part of our consumer segment and we have announced the closure of that and that is meaningfully below our segment and our RPM average gross margin and meaningfully below our EBIT margin. And so while it will take some time and money, we anticipate that that will be completed by mid-calendar year 25. And that will, from a margin perspective, essentially be addition by subtraction. We have also rationalized some small project paint product lines in the U.S. relative to profitability and turnover. So we continue to use data better than we ever have and our Rust-Oleum business is kind of the leader across RPM in that to take a hard look at where we're making money and where we're not and how we would manage both our mix and as well as where we more in our industrial businesses incentivize our sales force to drive the mix that we want.

Okay. And then you also mentioned in Consumer Group that you had some success with some new international marketing campaigns. Can you talk a little bit about what those are and which brands they're impacting?

Sure. So there's really two areas that are driving our growth there. One is Zinsser. You know, we were the leader in specialty primers for a long, long time in North America. And certainly the idea of priming paint jobs is pretty ubiquitous in the U.S. now. Not so much so in the U.K. and Europe. And so we are seeing double-digit organic growth in the rollout in different markets of our Zinsser specialty primers. And that's pretty exciting to see. And it's good old education of the benefits of priming for paint jobs. And we seem to be the leader in a number of markets. The other area is an internet direct program in our Rust-Oleum business in the UK, where people can go online and actually buy small quantities of paint for specialty projects, and that has gone from single millions of pounds of business to teens millions of pounds of business and is growing at double-digit rates. Don't know where the top is on that, but it's been a pretty exciting growth initiative over the last three years. Great. Thanks so much.

Thank you. And our next question today comes from Gancham Punjabi with Robert W. Baird. Please go ahead.

Good morning, Gancham.

Hi, good morning. This is Matt sitting in for Gancham. So I guess I just wanted to dig in on pricing a bit here. Have you seen any pricing pressure across the various business units due to either competitive activity, promotional activity to boost volumes or from any index-related pass-through mechanisms?

The comments here are pretty much what we provided in the July earnings call. We have seen some reductions in pricing on some of our products in the industrial sector and a little bit in DAP that are more related to broad chemicals. So you saw a huge spike in silicone prices and that came down. You saw a huge price in certain residents, and those have come down. So in some instances, we have adjusted accordingly, but have been able to maintain strong margin profitability in that. And then we have had some pricing in consumer, and we talked about this in July as well, really related to price elasticity. In our highest performing product line, the universal paint, At one point, our prices got above $10 a can, and the data we had suggested the consumers weren't buying it there, so we adjusted accordingly in a couple of our big accounts. So those are principally the pricing actions that we've taken. It's been relatively modest across all of RPM, and as I said, on average in the quarter across our consolidated business, price was up about half a percent, and we would anticipate about a 1% impact of price in the full fiscal year, in part because of some modest raw material price increases in certain categories, particularly impacting consumer.

Got it. That's very helpful. And then the execution on the MAP 2025 program has been impressive in context of a pretty choppy demand backdrop. How much How much price cost benefit do you have baked into that cost savings number that you mentioned earlier for this year? And then what was the price cost impact specific to the first fiscal quarter here?

Maybe, Rusty or Matt, I'm not sure I understand the question. Yeah.

Yes, so bad. So with inflation, we would expect it to be pretty neutral in the second quarter. And then we would expect a little bit of inflation as we get in the back half of fiscal 25. And like Frank has talked about, we would expect pricing to be positive for both the second quarter and for the remainder of the year.

Got it. So it sounds like there wasn't much of a headwind or tailwind, or isn't much of a headwind or tailwind priced into the full-year guide.

That's helpful. Correct. Yeah, we did have a little deflation in the first quarter for raw materials, low single-digit deflation. But like I mentioned, expect that to be neutral in Q2. Okay. That's helpful.

Thanks.

Thank you. And our next question today comes from John Roberts with Mizuho. Please go ahead.

Thank you. Maybe I'll ask just one here. Do you think we're plateauing in reshoring and infrastructure activity? And so quarter to quarter, we're going to just sort of bounce up and down, but along kind of a top, given the comps here are from a pretty high level. Or do you think there's another leg of growth here to come in those two drivers?

Yeah, it's a great question. I don't think we're plateauing, but I think it's going to Play out over a longer period of time than people anticipated There's still a big slug of the infrastructure bill dollars that are unspent and so It will play out more slowly, but it will still be positive for the next couple of years and then you know from a political front I think what massively needs to be addressed is permitting there's been a lot of talk about that but except in a few places the permitting process is still long and arduous for big projects and so if there was any permitting reform in a new Congress I think that would reaccelerate some of these on-shoring initiatives particularly as it relates to energy and batteries and You know, you name it in terms of manufacturing. Those are the issues as we see them as we sit here today.

I know I said one question, but maybe put data centers, could you just maybe rank order that among just qualitatively what the most important drivers are of the growth? Is it in the top three or top five?

No, again, I don't have the data or numbers on that in particular. I'll tell you what's been impressive and sounds self-congratulatory, but we have been able to hang on to the entrepreneurial culture of RPM in the customer-facing parts of our business. And so if you look at our Euclid Chemical Company or Tremco Sealants and Waterproofing, StoneHard, their ability over the last couple of years to shift from distribution centers to the growth in the cannabis industry that, in terms of processing, was looking at FDA-qualified facilities, to manufacturing and onshoring to data centers has been really impressive. And it's pleasantly surprised me that our sales forces have been as agile as they've been because overall, particularly in our construction products group, The broad numbers on commercial construction in North America, our principal business, have not been good. But if you can go to where the growth is, you can still keep positive momentum. And I think that's a strength of RPM.

Great. Thank you.

Thank you. And our next question today comes from Mike Harrison with Seaport Research Partners. Please go ahead.

Good morning, Mike.

Hi, good morning.

Congrats on a nice quarter here. You mentioned in a couple of different segments some under-absorption related to plant startups and as some investments ramp up. So I was just hoping that you could talk a little bit about how we should think about that playing out during the course of the year. Is that under-absorption worst in Q2 and Q3 and then gets better in Q4? Maybe just talk a little bit about that timing. Thank you.

Sure. So first of all, it's under absorption across many of our plants because of lower volume. And it's particularly acute in our consumer businesses. Secondly, we have had some major initiatives which will roll off from a capital investment perspective into our P&L, particularly in depreciation. You know, we're sitting in our first ever RPM combined innovation center of excellence. So traditionally, our research and development has been by segment or by operating company. And this is a nearly $20 million investment that's being absorbed in terms of operating costs and depreciation by our specialty products group. And so that's part of the challenge to them in what's been a difficult volume environment over the last 12 or 18 months. We have this Residence Center of Excellence, another $20 million investment in Europe. That's also part of the specialty products group, our Dayglo color group. So we're making some strategic investments. We just ramped up and opened a new facility as part of our platform developing country group. It reports in PCG in Malaysia, and we will be opening a new plant in India this fall. adding to operating efficiency, all adding to capacity in places where we're growing, but none of which will be fully utilized when they first hit our P&L. Those are just some examples.

All right. That's very helpful. And then I'm kind of curious if you can talk a little bit about the construction business. I feel like last quarter you guys sounded a little bit less confident on the timing of infrastructure spend. You talked just on this call about maybe that playing out over a little bit longer period. I'm curious, how much do you think that depends on who wins the election in the US, or do you feel like these are committed dollars that will play out eventually regardless of who wins?

I think they're committed dollars. It's anybody's guess as to what happens based on who wins. But I think the Biden administration will be committed to seeing through successfully their Inflation Reduction Act spending, a lot of which is going into particular, call it industrial policy, as well as the infrastructure bill. Permitting, as I mentioned earlier, improved permitting processes will have to be a part of that. The Trump administration, if they follow through with what they're saying Uh, it's going to double down on, on shoring and supporting us manufacturing. So I don't see anything negative about that. You know, the consequences of debt levels, the consequences of higher taxes on corporations, the consequences of tariffs, um, all of those, uh, will not be favorable to manufacturing. And so it depends on, uh, what the reality is post election.

All right, thanks very much.

Thank you. And our next question comes from Mike Sisson with Wells Fargo. Please go ahead.

Morning, Michael. Hey, guys. Hoping the Guardians can execute as well as you guys did. So, yeah, I guess just one question. So for 26, what type of volume growth do you think you need to get to that 16%? And then, you know, if the Fed rate cuts work, let's hope – What type of volume growth do you think the RPM portfolio should generate over the next couple of years? And maybe if you have any thoughts between the segments.

Sure. Well, I will tell you if – and this is a big if and very wishful thinking – but if somehow we're able to turn the corner and generate 2% or 3% consolidated volume growth in the second half of this year – By our fourth quarter, we will be on an annualized run rate of 42% gross profit and 16% EBIT. That's how poised we are. And literally, whether we hit those on time or not is a function of growth, and we're not going to get to $8.5 billion, and we don't need to get an $8.5 billion to realize those. I don't know the answer to your follow-up question other than my earlier comment which is if we were on a path to something closer to $8 billion or $8.5 billion for this year, which was our original target, we would be meaningfully ahead of our 42% gross margin and 16% EBIT margin goals.

Got it. Thank you.

Thank you. And our next question today comes from Steve Byrne with Bank of America. Please go ahead.

Morning, Steve. Morning, Frank. I got a couple of questions actually in response to comments that you made, Matt. And that is the first one, just a few minutes ago, you made a comment about deflation was low single digit in the first quarter. You had cost of goods down roughly 50 million. Can you comment on how much of that was raws deflation versus your, your, you know, your map? facility closure initiatives reducing fixed costs. Can you split that out of that $50 million?

Yeah, I mean, so Steve, just to give you a sense, so about we had deflation of 2% in the second quarter. So the rest of it was a variety of different factors that related. Sorry, the first quarter, sorry. And so there are different factors, but certainly the work that our procurement teams are doing to reduce costs played into that.

The raw is still roughly 70% of cost of goods. So your procurement guys are working. Okay. And then the other thing you mentioned was about this new facility in Belgium. And Frank, you mentioned just minutes ago about these new plants, India and Asia. To get your... ex-US sales to represent more than 20% of the total, is that going to require building out manufacturing facilities globally so that you have more local supply? Or can you do it with more cross-selling or other initiatives that you might have in the works to drive that ex-US sales growth?

Sure, it's a great question. And so let me tell you what we've done differently. We did a report out to our board maybe three years ago, looking back 10 years in M&A, and we have a pretty strong track record of successful acquisitions. But the one area that stood out for us as not meeting our goals was what we called small and far away. And so this was a, call it the prior 10 years, of planting a flag in a distant developed world country with the notion that that small acquisition would be the catalyst for growth. And in fact, too many of those small little acquisitions in places in Latin America or Southeast Asia or India or the Middle East were ignored and atrophied. So it's the one area where we were destroying value, single millions of dollars at a time, with an exception, which is our South African and the African business run by a gentleman named Grant Boonsire and his team out of South Africa, where almost from the beginning, because of the unique nature of that country, they manufactured Carboline and Tremco and Stoneheart and then actually folded in a Rust-Oleum acquisition in spray paint in that market So they control all the manufacturing, they control all the administration, but they still go to market independently from a sales and marketing perspective. That was so successful that we, in conjunction with that report to our board, have now put Grant Boonsire and his team in charge of the Middle East, Africa, Southeast Asia, and India. We are confident that we now have an approach to profitably grow in the developed world in ways that we didn't in the past. And our last two years of growth and margin improvement there has proven that out. I'm actually going to be in Johannesburg next week with Grant and his team. And so a combination of a recognition of what we were doing wrong, an adjustment, And what's true for every business where you have good leaders, and we have a collection of good leaders in our platform group, we're going to be successful. And the fact that I'm taking time to go there tells you that we're excited about what that can do for us in the coming years. And so, yes, we're going to build out some capacity. We don't have any plans at this point for new capacity beyond the plant in Mumbai and the plant in Malaysia, along with existing facilities. But we're very excited about a path to profitable growth that, quite honestly, we really didn't have in the developing world until the last couple of years. Thank you.

Thank you. And our next question today comes from Joshua Spector at UBS. Please go ahead.

Good morning, Josh. Good morning. This is Lucas Bowman. I'm with Josh. I just want to get back to the kind of volume outlook for the balance of the year. So, I mean, the first quarter, was down about 2%. You know, the flat sort of second quarter sales guide sort of implies down kind of one to two as well. So, I mean, to kind of hit your low single digit growth for the year is implying that the volume's gonna pick up in the second half and they need to be up probably at least one to two at a minimum to kind of get into that range. So I was just wondering if you could please walk us through sort of where you see sort of the acceleration coming from in the portfolio and what's giving you confidence in the outlook there Given that I guess the end market data is still being either soft or kind of weakening and just to set up with that place would be great. Thanks.

Sure. So I'll take that by segment. As we indicated, both our construction products group and performance coatings group had positive volume growth in the quarter and that's on top of strong record growth in the prior quarter. And so we see that continuing, albeit at a very modest level. I commented to an earlier question that it feels like our specialty products group, after a very difficult 15 or 18 months, has bottomed out. And we will start to see flat-ish or modest growth there. And so I really think the optionality to your question is when the consumer segment will turn positive. We certainly round significantly easier comps there in the second half of the year. And so that's how I think about growth. We are managing well and finding pockets of growth in our more industrial segment operating units. SPG is turning the corner. Consumer is going to be facing easier comps in the second half. But what happens in consumer will be the variable in in meeting or beating our guidance for the year.

Great, thanks. And then just on the consumer side, so I'd preface this by saying that you guys have seemingly outgrown your end markets there for sort of quite a while. But just in terms of the broader markets, the DIY has now been weak for a number of years. We sort of had the high growth period in the pandemic that kind of masked the underlying growth trends there in the market. But now most of the producers are sort of back below sort of what the pre-pandemic levels were. So it's sort of really sort of hidden what the underlying potential growth trends are, I think. So I was just curious to kind of get your thoughts on like what the medium term sort of end market algorithm looks like they're now in consumer. Is that, could that potentially be lower than what we thought it was like a few years ago? Or do you think this is like a longer cycle business? So this has just been quite a really long cycle with the interest rates. And then as we get that to come down, we'll see sort of the inflection later. So just wondering on your thoughts there, and then maybe if you could, if it'd be helpful to kind of put it in the context of what happened in the last cycle in 2008, if that had helped too. That'd be great. Thanks.

Sure. So first of all, I think your assessment of that market through the COVID cycle is correct. You know, there were big spikes and then people have found themselves back to kind of pre-COVID volumes and have added to adjust accordingly. The biggest driving factor, at least in our portion of DIY, is housing turnover. You know, you went through The COVID challenges, the price, massive inflation-driven price increases in housing, whether that's rental or in what we care about is homes, and high interest rates and high mortgage rates. And historically, they're not crazy high. If you're my age, you remember these as pretty reasonable. But for a period of 10 or 15 years, people could buy long-dated mortgages at very low interest rates. And so the mortgage costs, I think everybody on the call knows this. We are at 30-year low. And so I think the big driver here, there's nothing cyclically changing or structurally changing about our industry, but we get a double bang when someone sells a house. They use our patch and repair products and our small project redecorating products to fix up their home to prepare it for sale. And then a new person buys that home and they redecorate a room They do an addition. They redecorate a kitchen or a bathroom. And again, whether it's our DAP, caulks, and sealants, patch and repair products, the Rust-Oleum and or Zinsser primer products get a benefit from that. We're at a 30-year low in housing turnover. As interest rates improve and as the housing turnover picks back up, which it will, you'll see the dynamics that that drives in our consumer segment pick back up as well. So we don't think anything structurally has changed. We just find ourselves in a unique circumstance relative to housing prices and turnover and your correct assessment of the big spike and then decline relative to what happened during COVID.

All right. Thank you.

Thank you. And our next question today comes from Silke Kurek with JP Morgan. Please go ahead.

Morning, Silke.

Hi, how are you?

I'm sitting in for Jeff today. Your second quarter outlook is for like no flat sales and 5% EBIT growth. And like what that translates into is like 1.8 billion in sales and like 250 million in EBIT. And that really means that your EBIT margin is something like 14% in the second quarter. And does that seem the right number or does it seem low? Because if you, you know, if you hold your gross margin flat, you know, I would imagine not thinking SG&A spending is going up or do you like, it seems like a big, like I understand that the margin, there's always a margin deterioration in the smaller quarter, but unless you're beginning to spend on SG&A again, it seems it's a conservative outlook.

So yes, I appreciate your comment about cyclicality. So our different quarters obviously have different margin profiles based on not cyclicality, but the seasonality of our businesses. And so our second quarter is typically lower in volume seasonally than Q1 or Q4. But versus the prior year second quarter, I would anticipate us holding or marginally improving gross margins. And the SG&A discipline that we initiated in Q4, we will certainly hold in Q2. So I don't think there's anything that's changing in terms of the margin dynamics or the SG&A spending or the gross margin improvement driven by MAP that you're seeing in Q1. It's really just a function of volume growth. And so the premise of your question is correct. And no, we're not going to be sliding backwards on margins. And no, we're not going to be giving up SG&A discipline. So, in many instances, and I think this is the guidance we've provided, feels today a little bit into our second quarter that Q2 is going to look like Q1. Any additional volume growth than we're anticipating will make that improve.

Okay. Is your expectation that your SG&A spending in total will be down for the year?

I don't know that. I don't have that in front of me. Our expectation is our SG&A as a percent of sales will be improved for the year, but I don't know, silk off the top of my head, actual dollars. I can tell you this, and again, the same will be true in the second quarter, and this is really a testament to the design and execution of our MAP initiatives, and it is across RPM. We had 20 some million dollars in fiscal 24 of green belt driven improvements. And that is $100,000 improvement here and a $200,000 improvement there across our plants and across our businesses. And so those disciplines are continuing. And so our strength in these programs is a cultural change. And then the real focus in many, many places on continuous improvement and operating excellence In most cases, the dollar amounts of which aren't huge, but when you add them all up, they're meaningfully moving our conversion costs and adding to our bottom line. In most of my career, in our industry, if you had a 2% decline in sales, you'd be giving credit to have managed your decremental impact quite well if your earnings only declined 4 or 6%. When we pump out a another quarter of flat sales and can show solid EBIT growth and teens EPS growth, I think we're operating at a pretty good level. Our challenge is growth. And we are working on it intensely. And it's true across the whole industry. But we want to be the company that comes out of the box sooner and with a point or two of better growth than everyone else. And when that happens, we'll really reap the benefits of our MAP initiatives.

I also want to ask about like the map related question on that matter. So there's about like 25 million in charges that you took in the quarter that mean like restructuring charges, professional fees, ERP consolidation. And arguably these are like all like, you know, map initiatives. If that's the run rate for the year, you know, there's sort of like $100 million in spend that's tied to the $125 million run rate and MAP savings, right? Is that like the right way to think about it?

Yeah, I don't have the cost in front of me. Maybe Matt or Rusty can dig them up. It's our expectations that when we finish the year, we will have benefited fiscal 25 on a full run rate. You won't see it flow through our P&L. But when we achieve the remaining part of MAP 25, we will have improved our cost structure and efficiency across RPM by another 180 million bucks. Not all of that will flow into fiscal 25. You'll see the full amount of that flow into fiscal 26. And the costs related to some plant consolidation in Europe through significant through significant spends in the data area. So we're spending more dollars in the IT data area, which are one time to really marry up data, which is helping us a lot.

Yeah, and Silke, if you need more detail, we provide that in the earnings release. Behind the supplemental segment information, you'll see a footnote in there that breaks out the MAP add-backs. In the three categories, restructuring, related to plant closures, ERP, and professional fees.

That's right. That's where I got the $25 million from. That's, you know, so like I was just wondering if that's like the right number to annualize to sort of think about the cost tied to that. Yeah. If I can ask like a last question. So there's like this litigation between like Rustoleum and NIC Industries. resolution of that that you'll have to take like a $190 million accrual?

No, so the range on that is a half a million dollars, which is our current accrual and the original verdict of 190. We are sticking with the lower end of that range. To put that in context, this is about a $2 million set of the Rust-Oleum white new products. And it is a contractual IP litigation. It is not product performance, not any other liability. And so I think just the simple fact that you're dealing with a $2 million product line in light of the original verdict kind of puts in context many reasons why we feel strongly about the possibility of a significantly different outcome on appeal.

Thank you. And our next question today comes from Alexey Efremov with KeyBank Capital Markets. Please go ahead.

Good morning. Thanks. Good morning, everyone. In TCG, you mentioned positive impact of more effective sales management systems. Could you just elaborate on that, please?

Sure. We are using data to look at our different product lines, PCG, consumer, CPG, almost all of our businesses. And we have moved from a company that quite honestly four or five years ago wasn't very good at analyzing mix on its prior financials like this quarter or the past year to a company that is using data to try and manage mix on a prospective basis. So we are incentivizing with adjusted commission or bonus structures our sales forces to focus on the products that we have a competitive advantage on and typically higher margins. And it's having a positive effect. And so it's just being more sophisticated with data. It's being more sophisticated with understanding the true profitability in real time of different product lines or SKUs, and then either adjusting through some product line rationalizations or adjusting through incentive programs where we're focusing our sales force's time and attention, and you're seeing that as a piece of the margin improvement. It's interesting to note in the quarter when you look at Our MAP savings, and again, this will highlight for those on the call why we're so focused on volume, 80% of our MAP savings were in the gross profit cost of sales line. And so that's where a lot of MAP25s focused, whether it's driving better conversion costs or whether it's driving an improved product mix. It's great news. It's hard work. It's happening everywhere. And as I said earlier, it doesn't mean a damn thing unless you can sell another dollar of volume. And then that extra dollar of volume or that extra unit volume really hits your bottom line well because it fully reflects the benefits of all the work.

Okay. Thanks a lot, Frank. Thank you.

And as a reminder, ladies and gentlemen, if you'd like to ask a question, please press star then 1. Our next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Good morning, Arun. Good morning, Frank. Thanks for taking my question. I think you've answered most of them, but maybe I'll just get some of your elaborated thoughts on a comment you made earlier. So commercial, I guess, hasn't been that great, but you've still been able to see some success in CPG and PCG. So do you expect that to continue, or is commercial kind of you know, maybe regressing a little bit more. And do you expect any kind of benefit from lower rates there, or is that more of a consumer phenomenon? Thanks.

Sure. So, yes, in terms of lower rate impact, and I'll go back to my earlier comment and the work that Rusty did for our board, just like it took a couple quarters and three or four of the interest rate increases to finally slow down manufacturing and I can tell you the broader economy apparently didn't get into a recession but if you're in manufacturing or housing the last 15 months have not been a lot of fun and so I think it'll take the same couple two or three quarters or two or three interest rate cuts to start to flow into a pickup in broader commercial new construction in housing in the interim So I'll give you a couple examples. Panelization is a big area of focus for our construction products group. It is the assembly of panels that are sent into commercial areas and allows for less labor and a more rapid construction time cycle. And so that's an area we're focused and it's an area that's growing. New Dura, which was principally residential and in the beginning of COVID, boomed. So a $40 million business that boomed up to 100. And then when interest rates went up and the housing market slowed, we saw a decline in revenues of 30% or 40%. There is now a very concerted effort at Tremco with New Dura to focus on schools, to focus on facilities that house safety personnel. So think police departments, fire departments, EMS. And we are seeing specs grow, and we are seeing real solid double digit growth, albeit on a lower base. But what's exciting about it is it's a much better balance between residential and commercial activity from what was previously mostly a residential product line. So there are real deliberate, thoughtful, strategic efforts across multiple product lines, like the two examples I gave, again, to figure out how to get growth in a pretty low growth, no growth environment.

Okay, thanks for that. And then just maybe another follow-up on capital allocation. So is it, I guess, your objectives to continue to grow inorganically maybe through bolt-ons, or is there something a little bit more substantial that you could pursue? And similarly, are there any product lines that are – potentially holding back your growth and maybe would be best in another company and you're looking to dispose of? What's kind of the portfolio review kind of telling you these days?

Sure. So we constantly look at our portfolio and we pruned a couple of product lines over the last two years. We had what was a material, chemical treatment for fabric and leather, our Guardian protective products business that over time turned into basically a consumer warranty business. They used to call them dry warranties. It meant you were issuing warranties without selling product. And we did not see ourselves as being competitive in that space. So a couple of years, we sold that. Very high margin, really good people. but the ability for us to compete with big players in the insurance industry was not in the cards, so we sold it. We had some infrastructure service businesses in the UK. Unlike Tremco Roofing and Stonehard, which the majority of a supply and apply contract, 50% or more, is material. In this case, it was a construction services business that was very lumpy and had high working capital requirements. So we divested that business through an MBO and then shut down another part of that business. So the pruning we've been doing has been more akin to the portfolio reviews or kind of product rationalizations of looking at product lines or, in those two cases, smaller businesses that didn't fit the criteria that we're striving for. We'll continue to do that, but we don't have any large divestitures in mind today. And we will continue to pursue the small to medium, both on product line program that's been very effective for RPM for the last 20 or 30 years. We are always open to the large transactions that are out there. We'll look at them. It would be irresponsible not to. And, you know, I can say this because it was very public. PPG hired Goldman Sachs to sell their $2 billion North American architectural business. Of course, we looked at it, but we continue and will continue to apply the RPM discipline to value. We're not interested in getting bigger. We're interested in getting better.

Thanks.

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Frank Sullivan for closing remarks.

Thank you, Rocco, and thank you to all for your participation in our investor call today. We appreciate your interest and investment in RPM. Many thanks to our associates, some of whom are on the call, for what's been a really remarkable conversation. combined effort of 17,000 plus associates around the globe who are executing in each in their way on our MAP initiatives. The cultural change that we've affected is more powerful than the simple act of closing plants or some of the cost reduction actions we've taken and it's paying off for us. We have our virtual annual meeting of stockholders tomorrow at 1.30 p.m. Eastern Time and would welcome any and all of you to participate in that as well. Thank you for your interest in RPM and have a great day.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.